I saw in The New York Times that you and Dick Cheney are considering
the possibility of naming a Democrat to serve as Treasury Secretary in a Bush
administration. The report from Austin said you raised the idea with Senate
Majority Leader Trent Lott and House Speaker Denny Hastert, and they said they
did not like the idea at all. I didn’t either, but then it dawned on me that
Felix Rohatyn, our current ambassador to France, is a Democrat, and would make
a wonderful Treasury Secretary. I floated the idea past some of my Republican
political friends, who are generally Reaganesque in their economics, and there
was universal enthusiasm. Felix is a “growth Democrat,” just the kind of
man who could represent your agenda on Capitol Hill in a way that would
produce optimum bipartisan results. Here are excerpts from an op-ed piece he
wrote for The Wall Street Journal on April 11, 1996, “Recipe for
Growth,” when he was a managing director of Lazard Freres & Co. I found
it exciting when I read it at the time, a genuine breakthrough in thinking
about the world political economy. It really is a recipe for bipartisan
economic growth, a rising tide that lifts both political parties.

* * * * *

In order to deal constructively with
the realities of technology and the global economy, Democrats and Republicans
may have to abandon cherished traditional positions and turn their thinking
upside down: Democrats may have to redefine their concept of fairness, while
Republicans may have to rethink the role of Government.

The American economy is growing very slowly despite occasional upward blips.
Growth and inflation are both around 2%.... The social and economic problems
we face today are varied. They include job insecurity, enormous income
differentials, significant pressures on average incomes, urban quality-of-life
and many others. Even though all of these require different approaches, the
single most important requirement to deal with all of them is the wealth and
revenues generated by a higher rate of economic growth. John Kennedy was
right: A rising tide lifts all boats. Although it may not lift all of them at
the same time and at the same rate, without more growth we are simply
redistributing the same pie. That is a zero sum game and it is simply not good
enough.

The fact that our 2%-2.5% present growth rate is inadequate is proven by the
very problems we face. The question of when, and especially how, to balance
the federal budget deserves a great deal more intelligent discussion than the
political sloganeering we have heard so far. The budget is a document that
reflects neither economic reality nor valid accounting practices. If the
budget is to be balanced in order to satisfy the financial markets, only real
justification of this goal, then it must be done with growth rather than with
retrenchment. That higher growth, together with controlling costs of
entitlement like Medicare, Medicaid and Social Security, will generate the
capital needed to provide both private and public investment adequate to the
country's needs.

Bringing the rate of growth from its present 2%-2.5% to a level of 3%-3.5%
would generate as much as an additional $1 trillion over the next decade. It
could provide both for significant tax cuts for the private sector as well as
for the higher level of public investment in infrastructure and education
required as we move into the 21st Century. It would obviously generate
millions of new jobs. The present bipartisan commitment to balance the budget
in seven years, based on the present anemic growth, is economically
unrealistic and probably socially unsustainable. In all likelihood, higher
growth is in fact the only way to achieve budget balance. The question is how
to achieve it.

The conventional wisdom among most academic economists as well as the
Treasury, the Federal Reserve Board and Wall Street is that our economy cannot
generate higher growth without running the risk of triggering inflation. Not
everyone shares that view. In particular, the leaders of many of this
country's leading industrial corporations believe that we could sustain
significantly higher growth rates based on the very significant productivity
improvements they are generating in their own businesses, year-after-year.

Economics is not an exact science as we have painfully learned over and over
again. It is the product of the psychology of millions of consumers, of
business leaders making long-term investment decisions, of capital flows
instantaneously triggered by events and ideas. We must do away with the false
notion that we must choose between growth or inflation. Our experience, even
in the more recent past, shows that technology and competition can produce
growth without serious inflationary pressures. In the face of today's totally
new environment of almost daily revolutions in technology combined with
globalization, we should be willing to be bolder, both in fiscal and monetary
policy.

As a traditional Democrat, I have always believed that freedom, fairness and
wealth, basic to a modern democracy, required an essentially redistributionist
philosophy of wealth, that a fairly steeply graduated income tax was required
as a matter of fairness and that lower deficits would guarantee adequate
growth and a fair distribution of wealth. The experience of the last two
decades, with the advent of the global economy, has very much shaken that
view.

Fairness does not require the redistribution of wealth; it requires the
creation of wealth, geared to an economy that can provide employment for
everyone willing and able to work, and the opportunity for a consistently
higher standard-of-living for those employed. Only strong private sector
growth, driven by higher levels of investment and superior public services,
can hope to providing the job opportunities required to deal with
technological change and globalization. Only higher growth will allow that
process to take place within the framework of a market economy and a
functioning democracy.

We should have no illusions about the likelihood of reducing the level of
present income and wealth differentials; they are likely to increase in the
near future as the requirements for skills and education increase. The world
is not fair; we must, however, make it better for those in the middle as well
as at the lower end of the economic scale. The key is enough growth that, even
if initially the lower end does not gain as rapidly as the upper, it can
improve its absolute standard of living, and being a process of closing the
gap.

Higher growth requires a tax system that promotes growth as its main
objective. It must encourage higher investment and savings. That is not the
case today. Today's tax system aims at a concept of fairness dictated by
distribution tables. That may not be the best test. A tax system with growth
as its main objective may be a variation of the flat tax; or it may be a
national sales tax; or it may be another system aimed at taxing consumption
instead of investment such as proposed by Sens. Sam Nunn and Pete Domenici.

The power and dominance of global capital markets in today's world would seem
to aim in the latter direction. Lowering taxes on capital would at first blush
seem to help the already wealthy, current holders of capital. But whatever its
effect on the distribution tables, it could unleash powerful capital flows,
both domestic and foreign, that would lower interest rates significantly and
make investment in the U.S. even more competitive than it is today. At the
same time, they would maintain the strength of the dollar and maintain low
rates of inflation.

Achieving the objective of higher growth could also include the gradual
privatization of Social Security in order to create a massive investment pool
with higher returns for the beneficiaries and greater investment capabilities
for the private and the public sector. The key to economic success in the 21st
Century will be cheap and ample capital, high levels of private investment to
increase productivity, high levels of education and advanced technology. It
also includes higher levels of public investment in building a national
infrastructure supportive of the 21st century economy.

If the Democrats can redefine their concept of fairness, Republicans, on the
other hand, may have to abandon their view of passive government. If growth
and opportunity are to be the prime objectives of our society, the government
must play an active role in some areas. The first is education; the second is
higher levels of infrastructure investment; the third is in the maintenance of
a corporate safety net.

Public school reform, driven by higher standards, is an absolute priority.
Even though that is a state responsibility, it is a national problem. These
standards, regardless of today's political conventional wisdom, will
ultimately be national in scope. Access to higher education should be made
available to any graduating high school senior meeting stringent national test
levels and demonstrably in need of financial assistance. The equivalent of the
GI Bill, providing national college scholarships to needy students, should be
created and federally funded. It should be the primary affirmative action
program funded by the federal government.

As part of a higher economic growth rate, state and local governments should
provide higher levels of infrastructure investment. In addition to the
creation of private employment, this could also provide public sector jobs to
help meet the work requirements of welfare reform, as well as to provide the
support to a high capacity modern economy. Financial assistance from the
federal government would encourage the states in that endeavor. Higher growth
would enable federal as well as state and local budgets to take on this
responsibility.

A corporate safety net should be provided in order to deal with the inevitable
dislocations which corporate downsizings and restructurings will continue to
create. Business, labor and government should cooperate to create a system of
portable pensions and portable health care to cushion the transition from one
job to another. Incentives should be provided for business to make use of
stock grants for employees laid off as a result of mergers and restructuring.
If losing one's job creates wealth for the shareholders, the person losing his
or her job should share in some of that wealth creation. Corporate pension
funds, to the extent they are overfunded as a result of the stock market boom,
could be part of a process to provide larger severance and retraining payments
for laid-off employees....

Business and labor, together, should hammer out such an agenda. If we are
serious about balancing the budget in a responsible manner, the president and
the congressional leadership could set a national objective that the economy's
rate of growth reach a minimum sustainable level of 3% annually by the year
2000. They could ask the best minds in the country, from government, from
business, from labor and from academia to provide a set of options which could
lead to such a result. Many of these options would be politically difficult,
both for Democrats and for Republicans, and some would probably be impossible.
But the only way to abandon long-held notions that may no longer apply to
today's world is to discuss them within the framework of a very simple and
definite objective: higher growth...

The president's setting an objective of higher growth would have an important
psychological impact; the economy is, after all, heavily influenced by
psychological factors. If the president were to set an ambitious growth
objective, then all elements affecting the economy would be subject to review
from a different perspective. They would include fiscal and monetary policy;
investments and savings; education and training; and international trade. Most
importantly, these activities should take place within a framework in which
the Democratic Party redefines its concept of fairness and the Republican
Party redefines its concept of the role of government. At present, neither is
appropriate for the revolution that technology, globalization and the
inclusion of an additional one billion people to the global work force will
bring about tomorrow.

Ultimately, a rising tide will float all ships, and both political parties can
help bring this about. If they fail to do so, at a minimum the present malaise
will turn uglier, and it is even conceivable that another tide will sweep away
existing parties. If that were to happen, arguments about growth or fairness
will be totally irrelevant.